Palm oil refiners look to be out of a sweet spot. Wilmar, the world’s biggest refiner of the product used in everything from chocolate bars to instant noodles and biofuels, said on Wednesday that its net profit rose by 21 per cent in 2011. This might sound admirable, but it missed consensus forecasts. As a result, investors promptly wiped 11 per cent off the Singapore company’s share price.
At least these investors appear to be living more in the here-and-now. After all, crude palm oil hit an eight-month high on Wednesday. The theory is that rising prices will place pressure on refining margins, which fell by one-third at Wilmar in the last three months of 2011. Since palm oil refining and trading comprises half of Wilmar’s revenue, it is more exposed than its “ABCD” western peers (ADM, Bunge, Cargill and Louis Dreyfus), which deal in a far wider range of agricultural products.
Wilmar, though, has some long-term advantages. It resides on the doorstep of the biggest palm oil consumers – China, Indonesia, India and Malaysia. These countries comprise almost half of global palm oil consumption, according to Oil World consultants. Wilmar has refineries in all of them bar India, giving it unrivalled access compared with ABCD. Wilmar has also moved into branded goods – it holds 45 per cent of China’s branded cooking oil market, for example.
The margins of these consumer brands were hurt last year when the Chinese authorities imposed price controls in an attempt to curb inflation. But they doubled in the last three months of the year after Wilmar was allowed to raise prices again.
Agricultural commodity traders are going through a tough time as raw material prices soar. Wilmar trades at a premium of one-third to Bunge’s multiple and 14 per cent to ADM’s. That seems justified. Palm oil and Asia go well together.
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